My Business Project Failed The SR&ED Tax Credit Audit
By admin
Published On February 3, 2023
If you are reading this, a well-trained SR&ED consulting firm can tell right from the title that a business project does not qualify for the SR&ED Tax Credit. Many companies ask what the difference is or if there is any difference between a business project and an SR&ED project. The easy answer is yes there is a definite difference, but let’s dig into this further.
I think the place to start is to be clear about what the SR&ED tax credit is supposed to encourage.
The scientific research and experimental development tax credit are intended to stimulate advancements in a field of science or technology. The hope is that the advances will help innovation occur and thereby strengthen the Canadian economy.
Another way to look at it is to ask, “Do all business projects or technology projects strengthen the Canadian economy?” Certainly, some business projects and technology projects generate profit for businesses, but they are not necessarily innovative or built using new scientific or technological knowledge. So, an SR&ED claim that describes a business project or technology project fails to achieve the objective of the SR&ED tax credit program, to advance knowledge.
The SR&ED claim needs to show knowledge was developed and that it was developed with some proof that demonstrated the validity and accuracy of the knowledge. It might be tempting to think of someone with a white lab coat carrying out experiments testing a hypothesis, but the truth is many of us do this as part of our natural or usual process of working. Because of this, money is often left on the table since the claim amount doesn’t include all of the eligible activity.
Author’s side note: As an engineer, I did not realize how deeply embedded this structured analytical process became after 4 years of university in engineering. I took it for granted that the way to solve a problem was to develop an idea (aka “a hypothesis”), testing it to see if it worked, refining the idea (or coming up with a new idea) using the test results and then starting the cycle all over again. If you are asking, “Well, how else would you solve a problem?“ You’d be surprised at how much is done through guesswork, without any kind of analysis. |
So, the explanations of work performed in SR&ED claims (CRA’s form T661, lines 242, 244, and 246) can’t be about the business project or even the technical project (i.e. the technical work that was performed). Instead, the claim needs to
- explain the technological obstacle (aka problem) you ran into while working on the business project or the technical project
- “We didn’t know if a specific technological problem could be overcome.”
- why you decided to try to solve the problem by discovering new scientific or technological knowledge, and
- describe how you followed an iterative or cyclical process of developing a potential solution (i.e. “hypothesis”), testing the potential solution, learning from the test results and improving the potential solution for the next round of testing, learning and improving. (This is referred to as a ‘systematic process of investigation’.)
Author’s side note: Why isn’t the work performed in a technical project good enough for an SR&ED claim? A technical project usually consists of steps of standardized methods and processes. In other words, the knowledge of how to do the different steps is known, particular by a person who has expertise in the applicable field of knowledge (i.e., science or technology). The claim must focus on why the new knowledge was required and how was new knowledge found. |
Sometimes the failure to find a solution is incorrectly thought of as not being eligible for an SR&ED claim, but the SR&ED eligibility criteria never require success in the search for a solution to the problem. In fact, one of the approaches Braithwaite takes is to ask what failures were encountered.
>> To be continued <<
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